Suppose you are retired, or you have a nice nest egg saved up; however, you’re dealing with thousands in debt. Now you’re wondering, “If I file bankruptcy, will the court use my 401(k) money to pay my creditors?” We have good news for you: Your 401(k) is shielded from creditors if you file for bankruptcy. Meaning, you’re free to file bankruptcy and not a cent of your 401(k) money would be used to pay off your creditors. We have filed bankruptcy petitions for clients who had more money retirement savings than debt, and the debt was erased while the money in their 401(k) or other retirement account was untouched.
Suppose a debtor has a sizeable balance in their 401(k) and thousands in debt. Often, the retirement money is protected and their debt can be eliminated; however, this is only the case as long as the money is kept in the 401(k) account. If such a debtor were to withdraw the money from their retirement account before filing bankruptcy, then those funds would become an “unprotected asset.”
For example, let’s say that “Joe” lost his job and after 12 months of unemployment, he incurred $20,000 in credit card debt. Still unemployed, Joe dips into his 401(k) to pay his mortgage and daily living expenses. By doing this, the (withdrawn) funds in Joe’s 401(k) just went from a protected asset to an unprotected asset.
Are My Other Accounts Protected?
Not all accounts are considered equal; the funds in a checking or savings account, or a nonretirement investment account do not receive the same protections as the funds in a retirement account. So, if you have money in a 401(k), it’s not a good idea to withdraw it from your retirement account and move it to a standard checking or savings account. In that case, you could lose any funds taken out of your 401(k) account if you file for bankruptcy.